Dunkin' Donuts Will See a Shocking Profit Boost From New Tax Law

Shares of Dunkin' Brands Group (DNKN) rallied more than 2% on Thursday, Dec. 21, after Credit Suisse boosted its price target for the stock to $68 from a previous $61. Analysts Jason West and Olya Voronetskaya wrote in a research note that the GOP's newly passed tax plan should significantly improve Canton, Mass.-based DNKN's 2018 earnings per share.

"DNKN is a major beneficiary of tax reform (about 38% tax rate, one of the highest in the industry)," West and Voronetskaya wrote. "We estimate about 19% upside to 2018 earnings per share should DNKN's tax rate fall to 26% (fed + state/local). This would imply 2018 earnings per share closer to about $3.15 vs. current consensus of $2.66."

West and Voronetskaya also wrote that tax reform could help Dunkin' by resulting in a lower tax burden for franchisees, many of which could see a 20% pass-through deduction. That means "increased deductions for capex could also ease some of the cash flow drag from DNKN's recent decision to increase capex." The analysts noted that the company is subject to competitive pressure and dependence on franchisee capital for growth.

The analysts maintained their "Outperform" rating on the stock, but said their higher price target "embeds a high likelihood of tax reform tailwind and implies about 26x our current 2018 earnings per share." However, they noted that "DNKN shares have [already] moved up about 24% from the lows in September and are up about 13% since tax reform talk heated up in early/mid-November."

The news apparently helped push Dunkin's stock price up $1.52 to close Thursday at $65.01.

Both Republican-led chambers of Congress this week passed a $1.5 trillion tax-cut bill, which will lower the federal corporate tax rate to 21% from the current 35%. The measure now goes to President Trump for signature, which would make it law.